ECON 308: Employment Decisions Chapter 14 Attracting and Retaining Qualified Employees Chapter 16...
-
Upload
mason-bowman -
Category
Documents
-
view
218 -
download
0
Transcript of ECON 308: Employment Decisions Chapter 14 Attracting and Retaining Qualified Employees Chapter 16...
ECON 308: Employment Decisions
Chapter 14Attracting and Retaining Qualified Employees
Chapter 16 Individual Performance Evaluation
Week 14: Nov. 30 , 2012
1
Attracting & Retaining Employees
• Principles:– Maximum Value: Marginal Revenue Product
(willing to pay)– People won’t come to your firm until you make
them at least as well of as the could be elsewhere (Opportunity Cost: Have to pay)
– Paying more than is needed to attract employees puts a firm at a competitive disadvantage
– It is in the interest of both employee and firm to maximized the value created in the relationship
2
Chapter 14 Organization
• No-frills Competitive Labor Market• Some complications
– Human Capital– Compensating Differentials– Costly Information– Internal Labor Markets– The Salary-Fringe Benefit Mix
3
No-Frills Competitive Model
• Labor market is competitive – no discretion over wages
• Market Wages are costless to observe• Workers are identical• Jobs are identical• All labor is rented on the spot market• All compensation is monetary
4
Basic Competitive Model
Number of Employees
E
Wag
e in
$
Marginal Revenue Product of labor
Market Wage Rate
E*5
Human Capital
• Terminology– Human Capital: Skills– Investment in Human Capital: Education, OJT– “rate of return” on Human Capital: MB > MC
• Types of Human Capital– General (Excel, Word, text messaging)– Firm Specific: (proprietary software)
6
Compensating Differentials
• Consider 3 Welding jobs– Job X pays $8/hour in clean, air-conditioned
safe working conditions, – Job Y pays $8/hour in a dirty, outdoor
construction site,– Job Z pays $8/hour in ship construction
yard.• Is this an equilibrium wage?
7
Compensating Differentials
• Must pay more when a job has undesirable characteristics– $20-300 more must by paid for every 1/10,000
increase in the probability of being killed on the job
– A firm with 1,000 employees could reduce wages by $20,000-$300,000 per year by preventing one accidental death every 10 years.
• Knowledge of necessary CD how to invest in alternatives: safety devices
8
Compensating Differentials
• Implications– Unpleasant jobs get done– Companies are rewarded for making
jobs more pleasant– Workers may choose the level of risk
they wish to face
9
Compensation Information: Costly to acquire
• Compensation may be hard to see– Workers differ in human capital so they may
differ in the compensation offered– Firms don’t share all of the details of
compensation with prospective employees• Symptoms…
– …of over-paying: too many qualified applicants– …of under-paying: few applicants, high
turnover
10
Problems with under-paying
• Low compensation is associated with high turnover so costs of re-training are high
• When turnover is high there may be incentive problems
11
Internal Labor Markets
• Hire at entry level, promote from within– Law Firms, Accounting Firms, Hospitals– In 1991 an employee between 45 & 54 had
typically been with the same employer for 10 years or longer
– Half of all men and ¼ of women stay with the same firm at least 20 years
• Most Internal Labor Markets rely on implicit contracts
12
Tradeoffs in Long-TermEmployee Agreements
• Benefits of internal labor markets– Accumulates more firm-specific human capital– Better motivation– There is incentive to avoid behavior that is
dysfunctional in the long run– Managers know more about employee attributes
• Costs of internal labor markets– Restricted competition for advanced jobs
13
Pay in Internal Labor Markets
Tenure with the firm
SalaryCompensation
Marginal RevenueProduct of Labor
14
Tradeoffs with Career Earnings• Advantages
– Efficiency wages reduce turnover and shirking– Since pay rises faster than MRPL employees have strong
incentives to make the firm look good– Promotions become a reward for good behavior
• Disadvantages– Promotions may be manipulated because of destructive
behavior toward other rivals– Promotions are a crude incentive tool since they are
infrequent– The Peter Principle: People rise to level of incompetence– Much time may be spent lobbying managers for promotions
15
The Salary-Fringe Benefit Mix
• Fringe Benefits account for about 25% of compensation for the average American
• Examples– Health Insurance– Non-Social Security pension programs– Subsidized Education– Discounted Meals
16
Indifference Curves Between Salaries and Fringe Benefits
Fringe Benefits
Mon
etar
y C
ompe
nsat
ion
Utility = U1
Utility = U2
17
Iso-Cost Lines Between Salaries and Fringe Benefits
Fringe Benefits
Mon
etar
y C
ompe
nsat
ion
Slope = -1
Iso-cost line at $50,000 ($50K) of total payment$50 K
$50K
18
Optimal combination: Salaries and Fringe Benefits
Fringe Benefits
Mon
etar
y C
ompe
nsat
ion
$50 K
$50K$20K
$30K
19
Fringe Benefits• Payroll taxes
– Make the iso-cost line flatter– The total tax-bill (including the part paid by the
employees) will matter in determining the optimal mix of fringe benefits
• Applications– Fringe benefits can be used to screen for particular
types of employees– Cafeteria-style plans are desirable when
administration costs are low and when adverse selection is not a problem.
20
Chapter 16: Individual Performance Evaluation
ECON 308
Week 14
Performance Evaluation
• Evaluations provide employees feedback on achievement and ways to improve
• Evaluations are used to determine rewards and sanctions
• Performance evaluation entail evaluating employees as well as subunit of the firm
16-22
Implicit Assumptions• Principal knows agent’s production function• Output is single quantitative measure of
performance• Output can be observed at zero cost• Employee cannot game the measure• Employee produces a single output• Mutually beneficial contract is feasible• Employee works independently
16-23
Setting Performance Benchmarks
• Time and motion studies– Engineers estimate the amount of time a task
requires– Determines most effective work method
• Past performance and ratchet effect– Employees have incentives to only meet the
goal and not exceed it
16-24
Measurement Costs• Accounting system may need to be
developed
• Information systems improved
• Value-maximizing firm improves measures as long as incremental benefits justify costs
16-25
Opportunism
• Gaming– Employees may engage in dysfunctional
activities to improve their evaluations
• Horizon problem– Short-run objective performance measure
may cause employees to focus on results that influence their evaluation only over their remaining time with the firm
16-26
Relative Performance Evaluation
• Evaluate worker output relative to their co-workers in the same job
• Within the firm– jobs not always identical– group has incentive to punish “rate busters”– incentive to hire less competent workers
• Across firms– data hard to obtain
16-27
Subjective Performance Evaluation
• Firms often use subjective evaluation along with objective measures
• Multiple tasks and unbalanced effort– Workers have incentives to concentrate on
activities that are easily measured– The subjective measure will allow the
supervisor to determine cooperation and other difficult to measure activities
16-28
Subjective Evaluation Methods• Standard rating scales
– Rank employees on various performance factors
• Goal-based systems– Set annual goals and then measure whether
the employee achieved them
• Frequency– Often more frequent reviews are too costly– May be beneficial with new hires
16-29
Problems with Subjective Evaluations
• Supervisor shirking
• Forced distribution– May result in good employees being
evaluated poorly
• Influence costs
• Reneging
16-30
Combining Performance Measures
• Few job performance measures are purely objective or subjective
• Both types can be inaccurate– increasing inaccuracy of either places greater
weight on other– inaccuracies increase employee risk
• Both can induce dysfunctional behaviors
16-31
Comparing Individual and Team Output
25
2.5
Conrad’s and Dina’s individual effort levels
Exp
ecte
d ou
tput
Conrad and Dina’s team output
Q
e
Sum of Conrad’s and Dina’s individual outputs
16-32
Government Regulation of Labor Markets
• Anti-discrimination regulations dictate clear performance evaluation systems
• May be inconsistent with value maximization
16-33